The Praxeological Entrepreneur
January 16, 2001
The praxeological entrepreneur refers to action with regard to the economic data. Although Ludwig von Mises (1966) provided hints concerning how praxeological entrepreneurship could be defined and elucidated, he did not himself show how to do this. The paper expands on Mises's hints by developing a more complete concept of the praxeological entrepreneur, based on his discussion of the nature and method of praxeology and economics. It distinguishes the praxeological concept from the market process entrepreneur that has been commonly used in the neo-Austrian literature. It explains why the latter is less fundamental and shows how to use the former to explain economic progress under the conditions of the pure market economy.
1.Mises's Two Definitions of The Entrepreneur
2.Praxeology And Economics
a.The Goal and Nature of Economics
b.The Method of Praxeology and Economics
3.The Method of Contrasting Images of Functions
4.Assessment of The Promoter Concept
a.Promoters and Differences in Wants
b.Promoters and Differences in Abilities
c.Promoters and Progress
i.Economic Progress with a Praxeological Foundation
The Praxeological Entrepreneur
A crucial distinction in praxeology and economics is that between the distinctly human actor (Ludwig von Mises's "acting man") and the data. This distinction is reflected by Mises's use of two fundamentally different concepts of the entrepreneur. The first, which I shall call in this paper the praxeological entrepreneur, refers to "acting man in regard to the changes occurring in the data of the market" (Mises 1966: 254).(1) The praxeological entrepreneur is not an ideal type.(ibid.: 61) Rather the term refers to "a clearly integrated function."(ibid.: ) The second, which Mises called the promoter, "refers to a datum that is a general characteristic of human nature..."(ibid.: 255) This is the concept that he used in his market process analysis.
Arguably, Mises most important contribution to economic theory was his demonstration of its praxeological roots.(Lachmann 1976:56) It was this demonstration that gives Austrian economists their most potent weapon against behaviorism, positivism and panphysicalism. In light of this, one would have expected the praxeological entrepreneur to play a critical part in Mises's economic discussions. Remarkably, however, most of his discussions about the market and prices used the promoter concept.(2)
Mises's "praxeological economics" has not taken root, even within neo-Austrian economics.(3)Although some neo-Austrian writers on methodology and philosophy seem to have accepted Mises's praxeology as an approach to a theory of action or sociology,(4) they have neglected or rejected the praxeological nature of Mises's economics. The reason for this, in the author's view, is their focus on the less important concept of the entrepreneur in the market process. In this use, the term "entrepreneur" represents the "force" that leads to equilibrium. The entrepreneurs are said to be responsible, through their interaction, for a tendency toward the static state in the evenly rotating economy (ERE).(5) Yet, if the entrepreneur himself is a datum, how can he be an agent of change that brings about an equilibrium? An agent of change must appraise and "act on" the data; he cannot be a datum. What the user of the market process concept must demonstrate is why the idea of a datum that causes other data to reach an equilibrium or the ERE is a useful concept in economics.
Some economists have defined the market process more broadly or, in other ways, rejected this definition of the entrepreneur. One in particular has claimed that his definition is based on a concept of market process that is derived from Mises.(Salerno 1993) Nevertheless, no one has attempted to fill in the gaps in Mises's theory. This paper maintains that in order to understand the praxeological entrepreneur, one must begin with an image of the robotic behavior of the ERE (since the ERE contains no distinctly human action and therefore no entrepreneurship). Entrepreneurship stands in opposition to this. We understand praxeological entrepreneurship (and all economic action for that matter) by contrasting it with the ERE as an image of robots, which contains no entrepreneurship.
The aim of the present paper is to describe the praxeological concept of the entrepreneur and to claim priority for it. In so doing, the paper will suggest a reorientation of effort among those neo-Austrians interested in value and cost and, indeed, in all of economic theory. To accomplish this aim presents a somewhat difficult problem. Mises himself appears to have more frequently used the market process concept. Moreover, although he recognized the praxeological concept and seemed to assign fundamental importance to it, he did not himself "derive" it by using the method of praxeology. I have tried to fill this gap.(ibid., Ch. 5, 6) However, the context of my effort was not particularly clear, partly because I was unaware of what I now see as a rather deep gulf between most neo-Austrians and Mises. Whatever the reason, my message was not received. I do not intend to repeat here what I have written elsewhere. Instead, I will present a brief summary of my work in an effort to convince the reader on the basis of text references from Human Action and argumentation that the praxeological concept of the entrepreneur lies at the heart of Mises's transformation of the Austrian theory of value and cost, which built upon Menger's subjectivism.(Gunning 1997) Accordingly, the ideas that Mises presents in his market process analysis are more appropriately regarded as interaction among individuals who do not possess all of the characteristics of the praxeological entrepreneur.
This paper illustrates two shortcomings of Mises's descriptions of the market economy: (1) his failure to define the praxeological entrepreneur thoroughly and (2) his consequent disregard of certain problems raised by intersubjective uncertainty. Part one shows how Mises defined entrepreneurship in the two senses. Part two describes the relationship between praxeology and economics. Part three describes the method of imaginary constructions, shows how the method can be used to define the concept of the praxeological entrepreneur, and explains why this is important. Part four assesses Mises's idea of the promoter concept. Part five relates the paper to some of the relevant literature. Part six presents a brief conclusion.
1. MISES'S TWO DEFINITIONS OF THE ENTREPRENEUR
Mises based his first definition of the entrepreneur on the idea that entrepreneurship stands in contrast to the other economic functions. The following quotation illustrates this usage.
Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not the particular feature of a special group or class of men; it is inherent in every action and burdens every actor. In embodying this function in an imaginary figure, we resort to a methodological makeshift. The term entrepreneur as used by catallactic theory means: acting man exclusively seen from the aspect of the uncertainty inherent in every action. In using this term we must never forget that every action is embedded in the flux of time and therefore involves a speculation. The capitalists, landowners, and the laborers are by necessity speculators. So is the consumer in providing for anticipated future needs.(Mises 1966: 252-3)
In the context of economic theory the meaning of the terms concerned is this: Entrepreneur means acting man in regard to the changes occurring in the data of the market . . . (ibid.: 254)
Mises did not give a specific name to the first usage, although he had earlier in his book referred to it as the praxeological concept (ibid.: 61), as distinguished from the ideal type. In the introduction, I used the term "praxeological entrepreneur." The praxeological entrepreneur has characteristics that can be derived from the theory of action. As demonstrated below, it refers to all distinctly human action under the conditions of the market economy. We shall see that the praxeological entrepreneur appraises factors, bets that her appraisals are correct by making employment decisions, and bears the uncertainty connected with the production and/or exchange that results from her decision-making.
Although Mises did not give a name to the praxeological entrepreneur, it is evident that he regarded the concept as important. For he had just previously wrote that economics, in exploring "the structure of acting in the market society without any regard to the ends people aim at and the means they employ, is intent upon discerning categories and functions."(ibid.: 252)(6)
Nevertheless, having defined what I have labeled the praxeological entrepreneur, he went on to point out that the term "entrepreneur" can be used in a second sense, which stresses individual differences and the interaction among individuals. It is worth quoting him at length.
Economics, however, always did and still does use the term "entrepreneur" in a sense other than that attached to it in the imaginary construction of functional distribution [i.e., in relation to capitalists, landowners, and laborers]. It also calls entrepreneurs those who are especially eager to profit from adjusting production to the expected changes in conditions, those who have more initiative, more venturesomeness, and a quicker eye than the crowd, the pushing and promoting pioneers of economic improvement. This notion is narrower than the concept of the entrepreneur as used in the construction of the functional distribution; it does not include many instances which the latter includes. It is awkward that the same term should be used to signify two different notions. It would have been more expedient to employ another term for this second notionfor instance, the term "promoter." . . . [T]he promoter concept refers to a datum that is a general characteristic of human nature, that is present in all market transactions and marks them profoundly. This is the fact that various individuals do not react to a change in conditions with the same quickness and in the same way. The inequality of men, which is due to differences both in their inborn qualities and in the vicissitudes of their lives, manifests itself in this way too. There are in the market pacemakers and others who only imitate the procedures of their more agile fellow citizens. The phenomenon of leadership is no less real on the market than in any other branch of human activities. The driving force of the market, the element tending toward unceasing innovation and improvement, is provided by the restlessness of the promoter and his eagerness to make profits as large as possible.(ibid.: 254-5, italics added)(7)
In this passage, Mises says that the concept of the promoter focuses on differences among individuals. Promoters are more venturesome and quicker to notice and react to expected changes in the market data than their contemporaries. The difference between promoters and their non-promoting or less-promoting counterparts consists of (1) the psychological or physiological dispositions to take chances in the business world and (2) their abilities to appraise factors. Mises typically used the promoter concept to describe market competition. He maintained that if there were no changes in the other data, competition among promoters would lead to "final prices," such as were represented by the "evenly rotating economy."(discussed below)(8)
Although Mises seems to have preferred the first definition, he wrote that the second definition was more consistent with how economists had traditionally used the term and that it would be difficult to change the traditional usage. In commenting on the two different uses, Mises says:
There is, however, no danger that the equivocal use of this term may result in any ambiguity in the exposition of the catallactic system. Wherever any doubts are likely to appear, they can be dispelled by the employment of the term promoter instead of entrepreneur.(ibid.: 255)
However, if by using the promoter concept, readers have been led to neglect the praxeological
entrepreneur, it would appear that Mises was mistaken.
2. PRAXEOLOGY AND ECONOMICS
As pointed out in the opening sentence, Mises distinguishes between the distinctly human actor and the data.
Praxeology deals with human action as such in a general and universal way. It deals neither with the particular conditions of the environment in which man acts nor with the concrete content of the valuations which direct his actions. For praxeology data are the bodily and psychological features of the acting men, their desires and value judgments, and the theories, doctrines, and ideologies they develop in order to adjust themselves purposively to the conditions of their environment and thus to attain the ends they are aiming at. These data, although permanent in their structure and strictly determined by the laws controlling the order of the universe, are perpetually fluctuating and varying; they change from instant to instant.(ibid.: 646)(9)
Thus, there is the action of the distinctly human actor, which can be conceived in a general way, and there are the actor's (1) desires and value judgments and (2) theories, doctrines, and ideologies that are developed to fulfill those desires and to act in accord with the judgments.
In this quotation, Mises is speaking only of praxeology. As he points out elsewhere in the text, "[t]he first task [of praxeology] is to extract and to deduce...the concepts and theorems [that are] implied in the category of human action...to expound their implications and to define the universal conditions of acting."(ibid.: 64) But praxeology differs from economics. The second task is to "go further and define - of course, in a categorial and formal sense - the less general conditions required for action."(ibid.) Because "the end of science is to know reality," praxeology "restricts its inquiries to the study of acting under those conditions and presuppositions which are given in reality." "Market phenomena" are one set of subject matter in reality to which praxeology restricts its study. The study of these phenomena by means of the methods of praxeology is called economics.(ibid.: 234) Nevertheless, "this reference to experience does not impair the aprioristic character of economics and praxeology."(ibid.: 65)
To present its results, economics "adopts...a form in which aprioristic theory and the interpretation of historical phenomena are intertwined."(ibid.: 66)
From the unshakable foundation of the category of human action praxeology and economics proceed step by step by means of discursive reasoning. Precisely defining assumptions and conditions, they construct a system of concepts and draw all the inferences implied by logically unassailable ratiocination."(ibid.: 67)
To avoid error, the praxeologist and economist must "trace back all theorems to their
unquestionable and certain ultimate basis, the category of human action."(ibid.: 68)To avoid
error, the praxeologist and economist must "trace back all theorems to their unquestionable and
certain ultimate basis, the category of human action."(ibid.: 68)
The Goal and Nature of Economics
Mises pointed out that the ultimate aim of economics is to assess the various ideologies that
support the belief that a particular form of political organization or particular policies will enable
ordinary people to obtain more of what they regard as wealth.(10) Since the hypothetical image of
the unhampered market economy is an image of such an organization, we naturally begin by
describing it. We develop a subsidiary goal of describing "the contractual order of society."(ibid.:
198) "Economics is essentially a theory of that scope of action in which calculation is applied or
can be applied if certain conditions are realized."(ibid.: 199) However, partly because the image
of the unhampered market economy contains numerous specialized individuals - each having
separate and independent wants, abilities, knowledge, plans, and expectations - it is too complex
to describe in its entirety. The best we can do is to build simple images in order to elucidate
particular characteristics of it that seem important. Especially important are the incentives that
individuals have to use their abilities, knowledge, and property to participate in the complex of
interaction that enables others' wants to be satisfied. Another way to say this is that we come to
comprehend the image of the unhampered market economy by giving examples that contain its
essential characteristics.At first, we try to build images that help us understand the pure market
economy. In the pure market economy, we assume private property rights, specialization and the
use of money to satisfy all wants.(Mises 1966: 237) The pure market economy has no production
for personal use or barter. Moreover, because we want to begin with the simplest image, we
assume that it has no goods that have the so-called public goods characteristics of jointness in
consumption and non-exclusion.(11) Given this relatively simple set of circumstances, we consider
how specialized actors come to organize themselves to earn the money needed to buy the
consumers' goods that satisfy their wants.(12)Thus, in order to more competently evaluate policy,
we try to build an image of the market economy. But because the market economy is so complex,
we start with the pure market economy in which we assume that everyone aims to discover and
employ means of satisfying others' wants in order to satisfy his own. Everyone is an
entrepreneur. Entrepreneur in this sense means distinctly human action under particular
conditions.It is our attention to this part of our reasoning that brings to mind the proposition that
economics is really a branch of a much deeper system of thought - praxeology. Our goal as
economists is to develop a theory of a contractual order of society based on calculative action. As
we think about the images we must build to complete our task, we come to realize that
economics is a branch of praxeology.(ibid.: 1-7, 885) "The mental grasp and analysis of the
problems present in a calculating market system were the starting point of economic thinking
which finally led to praxeological cognition."(ibid.: 199)
The Method of Praxeology and Economics
Although the development of economics preceded the realization that this field is a branch of praxeology, that realization provides one with a means of improving economic thought by helping to reveal the methods that economics must employ. It revealed to Mises that economics deals with a different kind of subject matter than natural science and, consequently, employs different methods. The distinct method of praxeology, Mises points out, is the method of imaginary constructions.(ibid.: 236-7)(13)
The main formula for designing of imaginary constructions is to abstract from the operation of some conditions present in actual action. Then we are in a position to grasp the hypothetical consequences of the absence of these conditions and to conceive the effects of their existence. Thus we conceive the category of action by constructing the image of a state in which there is no action, either because the individual is fully contented and does not feel any uneasiness or because he does not know any procedure from which an improvement in his well-being (state of satisfaction) could be expected. Thus we conceive the notion of originary interest from an imaginary construction in which no distinction is made between satisfactions in periods of time equal in length but unequal with regard to their distance from the instant of action.(ibid.: 237)
The pure market economy it itself such an imaginary construction.(ibid.)Unfortunately, the only example from economics that Mises gives in this discussion is the use of an imaginary construction to comprehend the notion of "originary interest":
we conceive the notion of originary interest from an imaginary construction in which no distinction is made between satisfactions in periods of time equal in length but unequal with regard to their distance from the instant of action.(ibid.: 237)
However, the notion of originary interest has not achieved very wide acceptance. Indeed, it has
not even been understood.( Gunning 2000 ) Mises's example must have fallen on deaf ears. To
demonstrate the use of the method of imaginary constructions in economics, we must go beyond
Mises, which is what I aim to do in the next section.
3. THE METHOD OF CONTRASTING IMAGES OF FUNCTIONS
Unfortunately, Mises seemed to gloss over some of the details that ordinary readers would need in order to understand how to use the method of imaginary constructions to build the image of the pure market economy. It is evident, however, that one use he had in mind was to elucidate entrepreneurship and profit and loss. In describing the ERE, he wrote:
These insoluble contradictions [that change is eliminated in the ERE, that the ERE is not peopled with living men, that real action does not correspond to the ERE], however, do not affect the service which this imaginary construction renders for the only problems for whose treatment it is both appropriate and indispensable: the problem of the relation between the prices of products and those of the factors required for their production, and the implied problems of entrepreneurship and of profit and loss. In order to grasp the function of entrepreneurship and the meaning of profit and loss, we construct a system from which they are absent.(Mises 1966: 248, italics added)
This seems to say that one should begin with an image in which robots perform the behavior that we define as economic. Then he should contrast this image with what he can conjecture about how these functions would get performed under the conditions specified in the definition of the market economy. However, the question remains of how to derive the properties, or characteristics, of entrepreneurship from what we take to be the properties of the category of human action. We must do this in order to "trace back all theorems to their unquestionable and certain ultimate basis, the category of human action"(ibid.: 68, as quoted above).This is the task I set for chapters five and six of my 1990 book. Mises's chapters in Human Action on the properties of the category of action provided the guide.(ibid.: chapters four to six) My reading of those chapters suggested that the properties of action are ends and means, time, and uncertainty. So I set out to determine how these properties get manifest in the task of trying to satisfy consumers' wants in a market economy. Eventually, I aimed to discuss how individuals organize themselves to cause such want satisfaction to occur. But my immediate goal was to derive a definition of the entrepreneur that was so logically tight that it could always be traced back to the category of action. I began by considering the ends and means of the isolated actor. I reasoned that insofar as the isolated actor's act is relevant to the subject matter of economics, it would contain the following characteristics: production of goods, consumption of Mengerian first-order goods (Menger, 1981), identification of factors of production (Menger's higher-order goods), production of factors of production, estimation of the net benefits of particular production actions, saving, making decisions to produce, and bearing uncertainty. I went on to break these characteristics into two classes. I called the first class essential functions. These consist of the behaviors of producing the goods and factors of production, consuming, and saving. Since even animals would exhibit these behaviors, there is nothing distinctly human about them. They are characteristics of the isolated actor that correspond to essential behavior in the market economy. But nothing about these terms hints of their being associated with distinctly human action. I reasoned that the other characteristics - (1) identifying factors, (2) estimating the comparative net benefits of employing the factors in different ways, (3) making decisions, and (4) bearing uncertainty - were distinctly human.Next I turned to the market economy and asked how these characteristics were manifest. I began with the ERE. Mises had defined the ERE in the following way:
[T]he evenly rotating...is characterized by the elimination of change in the date and of the time element...The evenly rotating economy is a fictitious system in which the market prices of all goods and services coincide with the final prices. There are in its frame no price changes whatever; there is perfect price stability. The same market transactions are repeated again and again. The goods of the higher orders pass in the same quantities through the same stages of processing until ultimately the produced consumers' goods come into the hands of consumers. No changes in market data occur. Today does not differ from yesterday and tomorrow will not differ from today. The system is in perpetual flux, but it remains always at the same spot. It revolves evenly round a fixed center, it rotates evenly. The plain state of rest is disarranged again and again, but it is instantly reestablished at the previous level. All factors, including those bringing about the recurring disarrangement of the plain state of rest, are constant. Therefore prices -- commonly called static or equilibrium prices -- remain constant too.
The essence of this imaginary construction is the elimination of the lapse of time and of the perpetual
change in the market phenomena.(Mises 1966: 246-7)
I reasoned that consumption, production of goods and factors, and saving would occur in the ERE. This leaves the four other characteristics described above. I claimed that these characteristics of distinctly human action can be best understood by using the ERE as a reference in order to make a contrast. I proceeded to incorporate them into my definition of the entrepreneur. It is this definition that I propose to present as the praxeological entrepreneur that Mises had in mind when he spoke of the entrepreneur role and function. Similarly, when I employed the term "method of contrasting images of functions," I had in mind contrasting the functions performed in the ERE with what we can know through intuition and experience about how identifying factors, estimating comparative net benefits, making decisions, and bearing uncertainty could cause these functions to be performed under the conditions specified in the definition of the market economy.As Mises pointed out, the distinguishing feature of the market economy is economic calculation. To distinguish between the evaluation of consumers' goods by the consumer role and the calculations, which presumably are carried out by the entrepreneur function, he employed the term "appraisement."(ibid.: 331-2) However, Mises used a rather limited notion of appraisement. He wrote:
Appraisement is the anticipation of an expected fact. It aims at establishing what prices will be paid on the market for a particular commodity or what amount of money will be required for the purchase of a definite commodity.(ibid.: 332)
In this passage, he was assuming that "the structure of market prices appears to the individual as a datum."(ibid.: 331) Moreover, it is not evident whether he was writing about the praxeological entrepreneur or the promoter.(14) Indeed there is a noteworthy absence of any direct reference to the entrepreneur in this "Valuation and Appraisement" section. Being concerned with the praxeological entrepreneur, I used the term "appraisement" in a broader sense to represent two of the items on the list of entrepreneur characteristics: identifying factors and estimating the comparative net benefits of employing the factors in different ways.(Gunning 1990: 87) Appraisement means these two characteristics, given the presence of the conditions of the pure market economy as defined above.To represent decision-making under the conditions of the pure market economy, I employed the term "undertake."(15) To undertake is simply to make the act of will that causes later behavior to be performed. The consequence of undertaking is the allocation of resources. I had in mind the following:
The specific entrepreneurial function consists in determining the employment of factors of production."(Mises 1966: 290-1)
The function of the entrepreneur cannot be separated from the direction of the employment of factors of production for the accomplishment of definite tasks. The entrepreneur controls the factors of production; it is this control that brings him either entrepreneurial profit or loss.(ibid.: 306)
In the market economy, the identity of the individual who actually decides where how a factor
will be employed is the outcome of an exchange involving the original owners of the factors and
those individuals who appraise them at a higher value than the original owners. Both classes of
individuals exercise praxeological entrepreneurship.In using the term "uncertainty-bearing," I
converted the Misesian (or, more correctly, the Knightian) concept of uncertainty as a property of
the category of action into a form that was more suitable to represent what happens in the pure
market economy.(16) I wanted a way of referring to the employer's willingness to bear uncertainty
that suppliers of resources in the ERE, by definition, cannot bear. I also wanted to prepare for a
discussion of guaranty and endorsement. Guaranty refers to property that must be forfeited in the
event that a promise is not kept. Where the appraiser-undertaker does not bear all of the
uncertainty herself, it is specified in a contractual agreement. Endorsement, which I did not
discuss, refers to an individual's legally enforceable signal that she is willing to pay off a loan if
the original maker does not.(17) I believe that one of the deficiencies of Human Action and indeed
of Austrian economics generally is that it neglects the many ways that the burden of uncertainty
is dealt with in a market economy. Correspondingly, it lacks a treatise on financial systems and
credit. As a result, the foundation for its monetary theory is weak. This weakness is especially
significant in the Austrian theory of the trade cycle. Whereas the Austrians stressed time
preference and were late to recognize what they referred to as a "secondary depression," Herbert
J. Davenport recognized both the primary and the secondary depression and regarded the
weaknesses of the credit system under the conditions of the pure market economy as a primary
factor in the analysis of depressions.(Davenport 1914: chapters 7-9)In sum, the praxeological
entrepreneur is an appraiser, an undertaker, and an uncertainty-bearer. These characteristics are
defined in such a way that the intent is to exactly match the distinctly human characteristics of
the isolated actor. Thus, the aim is to construct a praxeological concept of the entrepreneur so
that it meets Mises's criterion of having the capacity of being traced back to the "unquestionable
and certain ultimate basis, the category of human action."(Mises 1966: 68, as quoted above.) The
method used to accomplish this goal is to contrast the function-performing robots of the ERE
with what one can understand, by means of intuition and experience, about distinctly human
action under the conditions specified in the definition of the market economy.In the neo-Austrian
literature, I am aware of only one other case where entrepreneurship is represented in a way
similar to this. But the authors merely stated the characteristics of entrepreneurship. They did not
4. ASSESSMENT OF THE PROMOTER CONCEPT
In this section, I use the concept of the praxeological entrepreneur described in earlier sections to assess the promoter concept. As pointed out earlier, Mises's concept of the promoter was based on the idea that the economist ought to take account of differences in initiative, venturesomeness, keenness of eye and mind, leadership ability, etc. The following assessment agrees that this is necessary in order to build a relevant image of economic interaction. However, it claims that to use the term "entrepreneur" in this context directs one's attention away from true entrepreneurship. Because the qualities that Mises attributes to the promoter are data, we should treat them as data that praxeological entrepreneurship appraises.
Because praxeological entrepreneurship represents all distinctly human action, the economist envisions all the data of the market economy through the eyes of entrepreneurship. She takes the "entrepreneur point of view."(19) For example, the economist would describe the wants of individuals by describing the part they play in entrepreneurship's appraisal of factors. The same is true of work abilities. If the economist wishes to describe differences in wants and abilities, she must begin by telling how they fit into entrepreneurship's appraisals. In such descriptions, subjectivism demands that she assume that different individuals acting in the entrepreneur role may make different decisions when faced with identical data. In addition, recognition of the limitations of the human mind (i.e., of the economist's mind) demands that she assume that she cannot know how a particular individual makes appraisals. Finally, her goal of making economics praxeological demands that she assume that, in their quest for profit, entrepreneurship will attempt to make accurate appraisals and attempt to correct what it deems to be inaccurate appraisals. The latter assumption corresponds to the assumption that an isolated actor would attempt to make decisions in his interest.
With these ideas in mind, one can assess Mises's treatment of the individual differences
described in his concept of the promoter. I first consider the idea that the promoter signifies
differences in wants. Then I consider the idea that the promoter refers to a difference in abilities.
Following this, I assess Mises's discussion of promoters in the progressing economy.
Promoters and Differences in Wants
Mises differentiates the promoter from other individuals by saying that such a personage is more "eager to profit" and more venturesome.(ibid.: 254-5) Presumably this means that one individual may get more satisfaction from bearing uncertainty and/or appraising than another. Let us assume first that Mises had in mind satisfaction from uncertainty-bearing. Consider an example. Suppose that two individuals, A and B, both believe that purchasing a set of factors, producing a good, and selling it will yield an identical loss of X dollars. The only difference is that B is so much more willing to bear uncertainty that she is willing to become a producer-seller in spite of her anticipated loss. A chooses not to become a producer-seller.
Now the important characteristic of this case is that the wants of B outweigh the wants of
consumers. But if B has wants, he can no longer be a praxeological entrepreneur. To retain the
praxeological concept of entrepreneurship, we should say that B plays two roles: that of the
praxeological entrepreneur and that of the consumer. If we do not do this, we run the risk of
falsely deducing that consumer sovereignty does not prevail in this circumstance; since carrying
out projects that a praxeological entrepreneur expects to yield financial losses is not, under the
conditions of the pure market economy, in the best interests of consumers.(20) However, consumer
sovereignty is a necessary consequence of the function-and-role logic that is implicit in the
assumption that the (praxeological) entrepreneur is the mandatory of the consumer.(ibid.: 303)
Because B herself is a consumer, a praxeological economist must regard her decision to carry out
the expected-loss project as an example of consumer sovereignty. The economist cannot regard a
particular want as a characteristic of praxeological entrepreneurship.
Promoters and Differences in Abilities
Mises says that promoters have "a quicker eye than the crowd." He means by this that individuals in the market economy differ in their abilities to recognize the gain that results from performing a given behavior. He also speaks of promoters as shrewder, more intelligent, quicker of apprehension, and farther-sighted.(ibid.: 328) This reflects his assumption that individuals differ in their abilities to perform specific tasks - in particular, the tasks associated with appraising and managing factors.
Suppose that others fully appraise the abilities. Then the abilities would merely be factors that entrepreneurship appraises. The abilities would not be part of praxeological entrepreneurship, although they may be abilities that aid entrepreneurship. For example, suppose that you differ from others only in that you are more capable of appraising or managing. Suppose further that entrepreneurship recognizes your superior ability. Then someone will bid for your services. If the bid is high enough, you would become an employee.
The more significant case is where only the individual with the assumed superior ability perceives his superiority and uniquely appraises it. Suppose that you are a superior appraiser of other factors or a superior manager and that you recognize your superiority. Other individuals do not recognize or are slow to recognize it. Assuming that you can afford to bear the uncertainty, you will proceed to employ your appraisement ability. You will do this by borrowing to purchase factors and then producing a good to generate revenue. You will have no opportunity to obtain employment that yields comparable income.
In this example, one might say that there are two causes of your decision to carry out the production-sales project: your superior ability and your appraisal of it at a higher amount than others' appraisals. Which one should be emphasized? If economists emphasize the first, then they can illustrate it by building a model of robot entrepreneurs with differing abilities. However, such a model would not represent the distinctly human action associated with praxeological entrepreneurship. We can only comprehend praxeological entrepreneurship by conceiving of the appraisement of the different abilities.
Differences in abilities are relevant to economics only insofar as praxeological entrepreneurship
perceives and appraises them. When this occurs, the entrepreneurship causes the abilities that it
regards as superior to receive higher prices. Or, if there is no market for such abilities, the
individual who possesses them will self-employ, provided that it possesses the funds to do so.
Promoters and Progress
To see how misleading and unhelpful this notion of the promoter can be, consider what happened when Mises combined the concept of the promoter with progress. He writes the following:
The vehicle of economic progress is the accumulation of additional capital goods by means of saving and improvement in technological methods of production the execution of which is almost always conditioned by the availability of such new capital. The agents of progress are the promoters intent upon profiting by means of adjusting the conduct of affairs to the best possible satisfaction of consumers. In the performance of their projects for the realization of progress they are bound to share the benefits derived from progress with the workers and also with a part of the capitalists and landowners and to increase the portion allotted to these people step by step until their own share melts away entirely.(ibid.: 297)
We must take Mises to mean that those individuals who are venturesome and who have superior abilities as appraisers and decision-makers cause progress but only (or almost only) if they possess or are provided with additional capital goods or with improvements in technological methods. They proceed to use these "vehicles of economic progress" in a way that helps satisfy consumer wants more effectively than otherwise. In the meantime, competition among promoters requires them to share their profits with the workers, financiers and property owners. Indeed, the promoters will ultimately earn no profit at all, since competition demands that factor suppliers and consumers reap all of the gains.
The first problem with this statement is the definition of progress. To form a praxeological definition of progress, we must link the idea of progress in a market economy to that of progress to the isolated actor. Let us try to do this with respect to the two means of accumulating additional capital goods that Mises identifies: saving and technological improvement. First consider saving. Consider the analogous Crusoe situation. Crusoe may save by devoting some of his energies toward the satisfaction of wants in the more distant future than previously. For example, he may spend more time and energy to improve the quality of his fishing nets than otherwise. Then he will have the means to raise his future consumption above what it would have been.
Although an increase in saving may result from pure luck, such as an unexpected windfall of goods available for Crusoe to consume in the near future, the goal of finding praxeological roots leads us to focus on a change in consumer's wants as a cause. Thus, we assume that the increased saving is due to a change in time preference, specifically to a decrease. By similar reasoning, an increase in time preference would lead to retrogression. As Crusoe grows older, he might decide to allow his previously maintained nets to deteriorate. Thus, a young Crusoe who has a low time preference would make progress while an older Crusoe who dissaves would retrogress. Because the progress is due to a change in time preference, the choice to use the means of production that are available to increase one's capacity to produce goods is a passive force. This suggests that promoters in the market economy would also be a passive force with respect to the change in social time preference that is the main cause of the economic progress. They would merely adjust the "structure of production" to a new configuration of individual time preferences. We could represent their adjustment by building a model of robot producers. No praxeological entrepreneurship is necessary to represent this cause of progress.
Now consider the second source of progress - the improvement in technical methods of
production. We can conceive of two sources of such improvement: good fortune and deliberate
exploration.(21) Suppose that the improvement in technological methods is due to good fortune.
Crusoe is walking along the trail and suddenly he is zapped with a dose of knowledge. Clearly,
such a cause is of no interest to the praxeologist. The second source - deliberate exploration - is
obviously relevant. It is initiated by human experimentation and inventiveness. This is the source
that fits neatly into the praxeological frame. We assume that human beings have the ability to
make such discoveries. Then we define progress as the changes in technical methods that are
achieved as a consequence of deliberate efforts to make them. It is true that saving may spur such
efforts. In this sense, Mises's statement about the importance of saving in promoting progress has
some empirical relevance. However, the operative praxeological concept consists of deliberate
actions aimed at improving goods and technical methods.
Economic Progress with a Praxeological Foundation
To link the discovery of new goods or technical methods to distinctly human action, we must connect it to some property of the category of action by means of a subsidiary assumption or set of assumptions. As pointed out above, action entails identifying factors and comparing the benefits from the alternative uses. There is no reason why these properties cannot be defined to imply the discovery of new products and methods of production. We only need to assume that the conditions under which action occurs include either (1) incentives to discover new goods and technical methods or (2) a inherent propensity to do so. Of course, the usefulness of our assumption depends on whether such conditions actually exist. To assume (2) would require some confirmation from psychology. To keep the analysis purely praxeological, let us consider (1). If we confine our thoughts to a Crusoe situation, we can certain build an image of a Crusoe who is faced with such a deteriorating environment that he cannot survive unless he produces new goods or discovers new technical methods. In this event the assumption that he does these things would seemingly be relevant. Experience suggest that distinctly human actors engage hardship by exercising their imagination and creativity. In this way, we could derive a praxeological cause of progress from a combination of two assumptions: (1) that human actors discover new methods in a deteriorating environment and (2) that the environment periodically deteriorates. A more generally applicable cause seems derivable.
Under the conditions specified in the definition of the market economy, the use of money and prices gives each actor a clear indication of the additional wants he can satisfy by earning money. At the same time, entrepreneurial competition takes place under conditions of continually changing data and social environment. The competition itself changes the data. Entrepreneurial competition is an environment in which the discovery of a new product or method of production - through deliberate action, luck, or whatever - prompts others to try to copy. Yet copying in a competitive market economy threatens the incomes of those who are copied, of their dependents, and of the employees who have relied on them. Under these conditions, each person is persistently at risk. To avoid the reduction of income that accompanies being copied, one must either copy someone else or discover a new product or method of production.
Copying need not mean mere duplication, as in the case of a mechanical paper copier. Anticipating future events that may erode profit, the distinctly human actor may be motivated to copy the other's "cognitive processes." As a distinctly human actor, a individual possesses more than an ability to ape the behavior of others. He possesses a unique ability to understand others (i.e., to put himself in the other's shoes). Not only can he produce a machine that models human intelligence, he may be able to go beyond the identified cognitive abilities of his competitors. In short, one person may be able observe the behavior of his competitor, postulate her thoughts, and improve on them.
In the modern world of international competition, there is a continuing stream of new participants who aspire to the standards of living that they observe in others both in their own regions and in other regions. They aim to copy the methods of production used by market participants who enjoy higher standards of living. In this circumstance, if the latter are complacent - if they fail to recognize that the means used to earn profit today are destined to become relics - they will retrogress.
Let us summarize. If a praxeological-based economist wants to use the term "progress" to refer to an improvement in goods or technical methods of production, it seems that he ought to assume that it is caused by deliberate human action - by forethought and planned experimentation. Since it is difficult to find a non-psychological reason in reality for an isolated actor to deliberately seek out new goods and methods, the economist should look for reasons in the forms that action and interaction take under the conditions specified in the definition of the market economy. From this point of view, Mises's attribution of progress to saving, the accumulation capital, and adjusting to consumers's wants is at best incomplete. In this paper, we go beyond Mises by attributing progress to deliberate choices under a condition where the failure to identify new products or methods of production will result in the reduction of consumer satisfaction (profit) and possibly threaten survival because of the continuing emergence of copiers who have the capacity to improve on the goods and methods of production used by competitors. In associating progress with both praxeological entrepreneurship and the desire to avoid a reduction in consumer satisfaction, we recognize that the motivator of entrepreneur action is profit and that the concept of profit ultimately refers to the gain derived from action.(Mises 1966: 289)
5. RELEVANT LITERATURE
Terminology problems are mainly the result of Israel Kirzner's use of the term "entrepreneur" to describe an arbitrager whose alertness to previously unrecognized opportunities for profit, cause a tendency toward market equilibrium and by his claim that this concept can be linked to Mises.(Kirzner 1982) Since Kirzner has achieved high and sustained recognition as an Austrian scholar, most writers on the Austrian concept of the entrepreneur have followed him. Kirzner idea of entrepreneurship as a characteristic of individuals that cause the discovery of all the data cannot refer to praxeological entrepreneurship. Thus, insofar as Kirzner defines entrepreneurship by referring to a tendency to discover all of the data, he cannot be referring to the praxeological entrepreneur. Action in a social world means interaction with distinctly human, free-willing other actors. This implies that although actors have a propensity to discover "data," each actor's discoveries change the "data" that other actors are motivated to discover. It follows logically that there can be no tendency toward discovering all of the data.
One critic of Kirzner's concept of the entrepreneur refers directly to statements in Mises's Human Action. Joseph Salerno argues that Mises's entrepreneur is quite different from Kirzner's. Salerno acknowledges Mises's use of the concept of the entrepreneur as a force that would lead to equilibrium in the absence of changes in the data. He points out, however, that the tendency-toward-equilibrium procedure was "never intended by Mises to provide a grasp of the function of the entrepreneur, whose activities drive the open-ended market process actually unfolding in time."
Salerno presents his criticism by means of a distinction between an "open-ended" market process and a "close-ended" market process, which uses tendency-toward-equilibrium" analysis. He argues that Mises's entrepreneurship was concerned with the former and that Kirzner's is concerned with the latter. He bases his argument on his interpretation of Mises's discussions of the promoter, or promoting entrepreneur.(Salerno 1993: 123)
The question raised by Salerno's critique, from the point of view of this paper, is whether he
recognizes or uses the concept of the praxeological entrepreneur. Is the entrepreneur in Salerno's
open-ended market process the praxeological entrepreneur? To elucidate the concept of the
entrepreneur he has in mind, Salerno points to Mises's statement that the "element tending toward
unceasing innovation and improvement [in the market], is provided by the restlessness of
thepromoter..."(1966: 255, italics added) Precisely what he or Mises means by restlessness is not
clear. In any case, it is evident that human action need not exhibit restlessness, innovation or
improvement. In other words, these characteristics are not necessary properties of action. But we
might ask whether they should be added as fundamental economic assumptions. Perhaps the idea
of restlessness should be added in the sense that, in order to describe the reality of interaction in
the market economy, we should attribute actors with the psychological trait of curiosity.
However, this is surely one of the less important assumptions that we must make to apply
praxeology to economics. Far more important is the idea of persistent intersubjective uncertainty
due to the inherent inability of one person to know the wants, abilities and knowledge of another.
When this idea is combined with those of (2) the entrepreneur as a functionary of consumers and
(3) entrepreneurial competition; it is not necessary to attribute innovation and improvement to
curiosity or restlessness. The innovation and improvement in an open ended market process can
be explained by competition among praxeological entrepreneurs under the condition of
intersubjective uncertainty. Such competition gives rise to an incentive to discover means of
satisfying wants that competitors have not yet been discovered. We conclude by agreeing with
Salerno that economics needs a concept of the entrepreneur that can explain the open ended
market process but we maintain that Mises's concept of the promoter is not sufficiently
praxeological to fulfill our needs.(22)
Mises's contribution to the concept of entrepreneurship should be viewed in the context of the history of economic thought on the subject. From this perspective, his closest predecessor was Knight. Knight's Risk, Uncertainty, and Profit (1921) had maintained that uncertainty in the market economy:
exerts a fourfold tendency to select men and specialize functions: (1) an adaptation of men to occupations on the basis of kind of knowledge and judgment; (2) a similar selection on the basis of degree of foresight, for some lines of activity call for this endowment in a very different degree from others; (3) a specialization within productive groups, the individuals with superior managerial ability (foresight and capacity of ruling others) being placed in control of the group and the others working under their direction; and (4) those with confidence in their judgment and disposition to "back it up" in action specialize in risk-taking.(ibid.: 270)
Knight did not use the term "entrepreneur" to refer to these creative actions. He reserved this term for the appraising and uncertainty-bearing producers in already-formed business organizations.(Gunning 1993: 40-41) His image of the entrepreneur, like Mises's promoter, was narrower than the praxeological entrepreneur. On the other hand, Knight's treatment of the relationship between entrepreneurship, appraisement, and uncertainty-bearing was superior to that of Mises. Knight made the appraisement of other would-be producing entrepreneurs a central feature of his image of entrepreneurial interaction.(23) Mises virtually disregarded it.
Mises's contribution was to expand the concept of the entrepreneur and to point the way toward a praxeological definition. Specifically, he implicitly used the term "entrepreneur function" to refer to the distinctly human element in economic interaction. Properly extended, such a contribution would lead economists to consider the creative actions that cause the discovery and introduction of new products and the discovery of techniques of production, including new forms of business organization.
A careful reading of Human Action can leave no doubt that Mises placed the praxeological concept of entrepreneurship at the center of the market economy. He also correctly described the method for elucidating it and gave some hints on how this method should be applied. However, for some reason he decided not to use the praxeological concept in many of his descriptions of entrepreneurship in the market economy. Indeed, in some descriptions it was not clear whether he was using the praxeological concept, the promoter concept, or both. This is undoubtedly a major reason why readers of Human Actionhave been unable to digest the lessons on the economic method and entrepreneurship that he taught.
Mises would have made a major contribution to efficiency in communication among economists if he had persuaded his readers to always use the praxeological concept of the entrepreneur in economic theory. Before presenting images of competing promoters, venturers, and intermediaries, Mises could have systematically employed what he called the "method of imaginary constructions," in conjunction with his definition of the market economy, to build the image of the praxeological entrepreneur. Doing this would have left no doubt that economics is indeed a branch of praxeology.
1. This concept is reflected most fully in Mises's notion of the class of pure entrepreneurs (ibid.: 256) and the corresponding image of a pure entrepreneurial economy. Besides "pure entrepreneur," one might use the term functional entrepreneur. See his discussion of the entrepreneur function on p. 61, 251-4, 299, and 306. I prefer to term "praxeological" on the grounds that it brings to mind the praxeological roots of economics.
2. Early in Mises's section entitled "entrepreneurial profit and loss," a section that one might have hoped would be the core of a praxeological economics, Mises points out that "[a]t this point, we are dealing with the promoters' entrepreneurial profit and loss."(ibid.: 290) However, it would be wrong to say that Mises always makes it clear which concept he is using. Indeed, he more often appears to leave the reader guessing. Perhaps the best example of this is where he writes that he wants to distinguish between promoters, managers, technicians, and bureaucrats. He begins his discussion by speaking of the "entrepreneur qua entrepreneur [who] acts as a mandatory, as it were for the consumers."(ibid.: 303) It would seem that he is here writing about the praxeological entrepreneur. If he is not, it would seem that he should be! Yet the section in which this occurs is entitled "Promoters, Managers, Technicians and Bureaucrats." And his discussion uses or implies the promoter concept on several occasions as well as the notion of the entrepreneur function. Also, at a later point, in speaking of how prices are determined, he refers to the driving force of the "promoting and speculating entrepreneurs."(ibid.: 328)
3. The term "neo-Austrian" was employed by Israel Kirzner to describe a mix of different ideas of economists who associate themselves with "the revival of interest in the ideas of Carl Menger and the earlier Austrian School, particularly as these ideas have been developed through the work of Mises and F. A. Hayek."(Kirzner 1987: 149)
6. In a very pertinent footnote (ibid.: 254), he refers readers who are interested in an "epistemological treatment" of this concept to John B. Clark (1899a: 5) and Eugen Bohm Bawerk (1962: 197-8), who had also referred to Clark. But the more relevant epistemological treatment is in a Quarterly Journal of Economics paper of the same year (Clark 1899b). In that paper, Clark asserts that the function of entrepreneurship lies in the dynamic part of economic science as opposed to the static part (as represented by Mises's ERE). Clark writes:
The origin and destination of profit is one chief subject of Economic Dynamics. That science, if it were complete, would examine seriatim the various changes that bring profit into existence, and the mechanism by which, under the influence of competition, that profit is ultimately diffused throughout the whole of society. It would study the effects of this diffusion on wages and interest.(ibid.: 198)
"Profit" here means the functional return to the entrepreneur, which is absent from the static part of economic science. As I read this paper, Clark's static part of economics corresponds to Mises's evenly rotating economy. Correspondingly, the dynamic part corresponds to Mises's elucidation of entrepreneurship and of profit and loss.(Mises 1966: 248, as quoted below)
7. The term "datum" is italicized because it has a specific meaning to Mises. It means the particular assumptions that the economist makes as opposed to (1) the general a priori assumption of action and (2) the assumptions that distinguish market phenomena from other phenomena. This term is discussed more fully below.
8. Mises appears to have borrowed the term "promoter" and its accompanying concept "speculator" from Wieser.(1967: 358-367) A careful reading of Wieser will show, I believe, that the Clarkian concept of the functional entrepreneur is absent.
10. Mises says that the aim of the economist is to try "to influence public opinion in order to make sound policies prevail in the conduct of civic affairs."(ibid.: 869). Also see his discussions on pp. 93, 238, 178-184, and his final paragraph on p. 885.
11. Mises apparently did not regard this assumption as important, since he dealt with the problems raised by these characteristics under a subsidiary title "The Limits of Property Rights and the Problems of External Costs and External Economies."(ibid.: 654)
Classical economics...had no place for the consumer. In the new economics promoted by the subjective revolution, by contrast, the consumer became, for the first time, not merely an economic agent. He became the primary economic agent on whose choices all economic values ultimately came to rest.(Lachmann 1982: 33)
Lachmann also apparently recognized that the critical difference between the subjective revolution and Mises's work was Mises's emphasis on entrepreneurship.(Lachmann 1951: 102) However, so far as I can tell, Lachmann did not endorse praxeology.
13. He writes flatly: "The specific method of economics is the method of imaginary constructions...This method is the method of praxeology...The method of imaginary constructions is indispensible for praxeology"(ibid.: 236-7)
14. That this is so is evident by his reference to promoting and speculating entrepreneurs on p. 328 and by his various references of a tendency toward the ERE caused by the operations of entrepreneurs.(ibid.: 329 and 334, for example) Praxeological entrepreneurship implies continuing identification of factors and setting of prices. Like the isolated Crusoe, the praxeological entrepreneur discovers items and actions to be factors that he did not previously regard as such. Also, the praxeological entrepreneur not only reacts to and tries to anticipate prices, he also announces his willingness to buy and sell at various prices. In other words, the praxeological entrepreneur tries to set prices. Also missing from this discussion is uncertainty-bearing.
15. This is a much narrower use of the term than in the historical literature on entrepreneurship. In the eighteenth century the term "undertaker" was employed as an English translation of Richard Cantillon's entrepreneur.(Hoselitz 1951: 204) Cantillon had used the term in a broader sense to refer to one of two classes, the other being hired people. The undertakers "were on unfixed wages." They may "set up with a capital to conduct their enterprise" or they may be "undertakers of their own labor without capital, and they may be regarded as living at uncertainty."(Koolman 1971: 283) The term was also used in British writings, most notably by Alfred Marshall.(Marshall 1961: 293)
17. I discussed guaranty in several places in my 1990 book. The subject of endorsement logically falls under the category of monetary theory. While I discussed this briefly in my analysis of Herbert Davenport's "loan fund theory of capital" ( Gunning 1998 ), a more complete analysis is under construction.
22. As an aside, it is not entirely certain, in spite of Salerno's statements, that Mises meant the promoter concept to refer to an open ended market process. For example, Mises also writes that the logical economist [as opposed to the mathematical economist] knows that "the promoters and speculators, eager to profit from discrepancies in the price structure, tend toward eradicating such discrepancies and thereby also toward blotting out the sources of entrepreneurial profit and loss."(ibid.: 355-6)
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Copyright 2000 by James Patrick Gunning
J. Patrick Gunning
Professor of Economics/ College of Business
Feng Chia University
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